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Hub-and-Spoke Cartels: A UK Phenomenon?

16 June 2010

Mayer Brown Article

The concept of using the existing competition rules, including those dealing with cartels, to police information exchanges between competitors, whether they are engaged in such exchanges directly, or via a third-party intermediary, is not, nor should it be, contentious. What matters is the nature of the information being exchanged, the intent behind the exchange and whether it can be characterised as having negative effects on competition - or indeed whether it is evidence of broader, hard-core cartel activities such as horizontal price fixing.

In the United Kingdom, following decisions by the Office of Fair Trading (OFT) in 2003 in respect of replica football kits1 and toys,2 the question of what constitutes illicit indirect information exchange (sometimes referred to as a ”hub-and-spoke” or an “A-B-C” cartel) was clarified by the Court of Appeal.3

(i) [where] retailer A discloses to supplier B its future pricing intentions in circumstances where A may be taken to intend that B will make use of that information to influence market conditions by passing that information to other retailers (of whom C is or may be one),

(ii) B does in fact, pass that information to C in circumstances where C may be taken to know the circumstances in which the information was disclosed by A to B and

(iii) C does, in fact, use the information in determining its own future pricing intentions,

then A, B and C are all to be regarded as parties to a concerted practice having as its object the restriction or distortion of competition. The case is all the stronger where there is reciprocity: in the sense that C discloses to supplier B its future pricing intentions in circumstances where C may be taken to intend that B will use that information to influence market conditions by passing that information to (amongst others) A, and B does so.4

Following this judgment, the OFT launched a number of investigations into the grocery sector. Early resolution settlements were reached with a number of parties concerning an investigation into dairy products in December 20075 and tobacco products in July 2008.6 A further investigation encompassing grocery retailers and their suppliers is ongoingvi7 and others, involving services to consumers, may materialise.

All of these cases have focused on indirect information exchanges between retailers via their suppliers.

Horizontal Collaboration

As mentioned above, there is nothing novel about concluding that the exchange of certain information between competitors can have negative effects and, hence, be contrary to competition law. Equally, there can be little dissent to the view that an illicit information exchange is no less harmful merely because the information was channelled through a third party.

The United Kingdom has nevertheless seen a particular enforcement focus, especially in the retail sector, on relationships between suppliers and their retailer customers. This focus has unintentionally deterred potentially beneficial collaborations between competitors (e.g., those with environmental or public health objectives, such as reductions in plastic bag use or concerns over minimum pricing for alcohol), over concerns that such collaborations might infringe competition law.

As companies seek to ensure ongoing compliance with the UK competition laws, there has been understandable concern, both from retailers and suppliers, as to how far they need to go to protect their interests and how practically they can do this in environments as traditionally fast moving as retail.

In practice, the OFT will continue to assess each information exchange on its merits. When seeking to bring infringement proceedings in an A-B-C cartel arrangement, the evidentiary burden on the OFT — and on any prosecuting authority — will remain high in proving the necessary degree of collusion between all participants.

Short-Form Opinions

Recognising that uncertainty over regulatory treatment of information exchanges can itself have negative effects on competition, the OFT held a roundtable discussion on competitor collaboration in October 2009. this, OFT is proposing to try a short-form opinion procedure aimed at providing guidance on a novel or unresolved issue of wider interest arising in the context of a specific proposal. In essence, this process is intended to provide business with preemptive guidance in the likelihood that a particular proposed collaboration meets the exemption criteria contained at Section 9 of the Competition Act 1998 and Article 101(3) of the Treaty on the Functioning of the European Union.

While full details of how this procedure will work, and a decision on the adoption of the first candidate cases are yet to be finalised, the development is to be welcomed. It is not expected that this will result in a return to notification of all potential collaborations between competitors, but it should nevertheless provide greater security going forward for businesses that wrestle with the dividing line between permissible and illicit information exchange.

Conclusion

In many respects, while the various retail investigations in the United Kingdom have placed hub-and-spoke arrangements firmly in the spotlight, this is neither a novel interpretation of existing competition rules, nor a uniquely UK phenomenon. Indeed, similar investigations have recently been launched by both the Dutch and German authorities, which suggests that further enforcement action in this area internationally is to be expected.

Footnotes:

1. OFT Decision of 1 August 2003 into Price-fixing of Replica Football Kits.2. OFT Decision of 21 November, 2003 into Agreements between Hasbro UK Ltd, Argos Ltd and Littlewoods Ltd fixing the price of Hasbro toys and games.3. Argos Ltd and another v Office of Fair Trading, JJB Sports plc v Office of Fair Trading [2006] EWCA Civ 1318.4. Ibid., paragraph 141.5. OFT announced early resolution settlements had been reached with a number of dairy processors and retailers on 7 December, 2007 (http://www.oft.gov.uk/news/press/2007/170-07). A further settlement was reached in February (http://www.oft.gov.uk/news/press/2008/22-08).6. OFT announced early resolution settlements with a number of manufacturers and retailers on 11 July, 2008 (http://www.oft.gov.uk/news/press/2008/82-08).7. Unannounced inspection visits to a number of retailers and their suppliers was widely reported in the press in April 2008.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown Mexico, S.C., a sociedad civil formed under the laws of the State of Durango, Mexico; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customs and trade advisory and consultancy services, not legal services.

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